Evaluate my real estate situation (very long)

[SomethingClever]

Inspired by DeathDonkey's post, although this is something I've been thinking about for a while.

Before I get into specifics, here is some background you should know. My wife and I are both 28; she's in grad school and I work in advertising. When she finishes her Master's next year, I'm planning on taking a leave of absence from my job so we can go traveling for anywhere from 6 months to a year.

That in mind... we purchased our first home in Portland, Oregon in 2004 for $207,000. It's an old farmhouse in an established neighborhood. If you know the area, Mt. Tabor. The neighborhood is terrific. It's about 10 minutes from downtown, and a short walk to Mt. Tabor Park, which is actually an extinct volcano within the city limits. We love it.

The house itself is on the small side (1,200 square feet not including the basement) but it has a huge yard and is plenty big for us. Two bathrooms, three bedrooms, two stories (not counting basement).

The house was built in 1894, but everything has been updated, including new plumbing, wiring, sewer, kitchen, etc, within the last 10 years. Since we moved in, we have done a lot of work too. I completely remodeled the office (I'd post pics but my home computer isn't working) and the main floor bathroom with subway tile, vintage floor hex til, new appliances, sconces, etc. We love living there and would probably stay another 5-7 years if it weren't for other factors (more later).

What we must now decide is whether or not to sell the house next year when we go on our trip, or look for tenants to rent it from us.

Other relevant details: We took out a 5/1 ARM at a pretty dang low interest rate back in 2004. Our thinking was that we very likely would be selling the house within 7 years (which is the approximate breakeven point versus a fixed rate loan), so the ARM made sense. We also plan on having kids when we get back from our trip, and we would need a bigger place for that, so that factor was additional reason to take the ARM.

Obviously it's tough to know right now what the market will be like near the end of next summer (when we would have to decide all this), but Zillow.com says the house is worth $285,000 today.

Given all the scary talk about a market collapse, I'm tempted to just sell next year before we leave on our trip. There's a good chance we can make a tidy profit.

HOWEVER

There are a few things I've been thinking about that make me want to keep the house and rent it out.

- It's a great house. We could potentially live there with an infant up to 2 or 3 years old. So that would give us a move-out date of around 2011 or so.

- It's in a desireable location. A lot of what I heard about the real estate bubble is that these "McMansion" type homes in far-out suburban locations are going to be the first affected.... because the supply is basically unlimited, but the demand will decrease because of the interest rate. You can't build more 1894 farmhouses 10 minutes from downtown Portland, so the supply is sorta fixed IMO.

- We could easily re-fi our ARM right now through ING and get a 7/1 that runs through 2013, giving us plenty of time to sell when we need a bigger place. But of course that would mean we'd need to rent the place out while we're gone.

- Portland is undervalued compared to similar West Coast cities IMO. Houses in Seattle are approximately twice as expensive.... you can't live in the city unless you're a millionaire. I think people are realizing this.

Thoughts?